Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition

Posted: 17 Mar 2009

See all articles by Paul J. Irvine

Paul J. Irvine

Neeley School of Business

Jeffrey Pontiff

Boston College - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2009

Abstract

Over the past 40 years, the volatility of the average stock return has drastically outpaced total market volatility. Thus, idiosyncratic return volatility has dramatically increased. We estimate this increase to be 6% per year. Consistent with an efficient market, this result is mirrored by an increase in the idiosyncratic volatility of fundamental cash flows. We argue that these findings are attributable to the more intense economy-wide competition. Various cross-sectional and time-series tests support this idea. Economic competitiveness facilitates reinterpretation of the results from the cross-country R2 literature, as well as the US idiosyncratic risk literature.

Keywords: G12, G14

Suggested Citation

Irvine, Paul J. and Pontiff, Jeffrey, Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition (March 2009). The Review of Financial Studies, Vol. 22, Issue 3, pp. 1149-1177, 2009. Available at SSRN: https://ssrn.com/abstract=1359528 or http://dx.doi.org/hhn039

Paul J. Irvine (Contact Author)

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Jeffrey Pontiff

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

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